Last updated: Jan. 15 2021
REITs work to attract larger allocations from retail investors.
REITs are drawing a bigger target on retail investors, reflecting the broader shift in overall retirement assets that is putting more money in the hands of individuals and their financial advisors versus the traditional pension fund manager or defined benefit (DB) plan sponsor.
Individual retirement accounts now represent the largest slice of the pie when it comes to overall retirement assets—37.8 percent of the $27 trillion in total U.S. retirement assets, according to data from the Investment Company Institute. Defined contribution (DC) plans, including 401(k)s also have increased slightly over the past several years to comprise 31.7 percent, while the volume held by DB plans slipped from 35.8 percent in 2011 to 30.5 percent in the second quarter of 2018.
“Plan sponsors, particularly on the corporate side, are shifting away from DB plans and into DC plans,” notes Kurt Walten, senior vice president, investment affairs and investor education at Nareit. In addition, individuals have growing 401(k) balances that are eventually rolling over into IRAs when someone changes jobs or retires. That’s why IRAs are growing, and as such, it is also why that segment of the market is getting more attention, he adds.
Retail investors have long been a focus for Nareit and the REIT industry. “REITs were first introduced by an act of Congress in 1960, and the purpose was to give the average investor access to real estate investment,” says Tim Berryman, director of investor relations at Medical Properties Trust, Inc. (NYSE: MPW).
Real estate is a good complement to a portfolio of stocks and bonds because it provides added diversification and has a low correlation to other asset classes, Berryman says. “In addition to other capital sources, REITs like retail investors because they represent growing demand for their shares and tend to be long-term holders, which can help to dampen share price volatility,” he adds.
As REITs continue to move into the mainstream of retail investment portfolios in both retirement and non-retirement accounts, REITs are recognizing an opportunity to capture a bigger share of those dollars.
Retail investors accounted for about 15 percent of direct REIT ownership in 2017, according to an annual report released by Michael Bilerman, managing director at Citi and head of real estate and lodging research. That data includes only those individuals who buy specific REIT stocks directly for their own personal stock portfolio and does not include more passive investment via exchange-traded funds (ETFs) or mutual funds. Dedicated U.S. REIT funds account for 23 percent of REIT ownership, which can include capital from both individuals and institutions.
Courting Retail Investors
Nareit has made a concerted effort to reach out to retail investors and strategically communicate the REIT investment proposition to financial advisors and financial intermediaries. Likewise, individual REITs also are working to get in front of retail investors and their financial advisors. “These outreach efforts cannot be half-hearted. It needs to be a consistent, dedicated initiative consisting of regular branch visits, calls to top financial advisors, and C-suite time and effort over many years,” says Sumit Roy, president and CEO of Realty Income Corp. (NYSE: O).
Realty Income started out with a grassroots approach to growing brand awareness with the brokerage community. “As a privately held partnership prior to our public listing in 1994, our investor outreach program was built by telling the Realty Income story one firm at a time,” Roy says. A decade ago, retail investors accounted for nearly 50 percent of the REIT’s ownership, but investment from institutional investors has grown so that retail investors now account for about 30 percent of ownership—still among the highest of the S&P 500 REITs, Roy notes.
Realty Income refers to itself as the “monthly dividend company.” “Retail investors, particularly those looking for income, are generally looking for reliable dividend payments that grow over time,” Roy says. “As baby boomers age—10,000 people per day are now turning 65—we think the value proposition of REITs will continue to appeal to retail investors looking for income.”
Since its initial public offering (IPO) in 2005, Medical Properties Trust has made a point to attend retail investor-focused events. Twice a year, the company attends larger events, such as MoneyShows, along with ongoing meetings and communications with individual investors and financial advisors.
“From our standpoint, we consider retail investors a very important component of our overall shareholder base,” Berryman says. “Currently, retail investors account for more than 15 percent of our stock ownership because they are attracted to the steady and predictable income that our dividends provide.”
Education Remains A Priority
REITs have pushed further into retail investment strategies, but education is still an important component in terms of reaching new investors and expanding allocations for existing investors. The challenge is that education often needs to run the gamut from explaining the basics to first time investors to having more detailed conversations with REIT-savvy investors.
Medical Properties Trust participates in sessions and panels at the larger retail investment conferences that might include a basic discussion explaining the benefits of REIT ownership and the different types of REITs that exist, to a more in-depth talk on industry news and trends specific to its asset base of hospitals. One topic resonating in 2018 is how individual investors can benefit from new tax laws that allow a 20 percent income tax exemption from the ordinary income component of dividends received from REIT shares held in a taxable investment account. “So, it is just a constant refresh to make people aware of the benefits of REIT ownership and also keep them apprised of new developments that might impact REIT investing,” Berryman says.
Retail investors do have more information and resources available today, and their sophistication level has grown, Roy adds. For example, online financial communities like Seeking Alpha have built a loyal following among REIT investors. “As a result, we find that retail investors are prepared with a greater understanding of our business and are better equipped to understand what drives the stock,” he says.
The focus for many REITs is also educating investors on what differentiates their company from other REITs, and especially other REITs in the same category or subsector.
“People do understand what REITs are and how they work. What we’re finding is that the more we educate people on Global Net Lease, the more positive the response is,” says James Nelson, CEO and president of Global Net Lease Inc. (NYSE: GNL). Understanding factors such as the strength of the net lease portfolio, tenant quality and duration of leases gives people a greater comfort level, he says.
One way that Global Net Lease reaches out to retail investors is by doing road shows with fund managers and financial advisors. “We have done a number of those in the past, and we will continue to do more of those as a way to educate and [help] people understand both our REIT and how REITs work in general,” Nelson says. As with most REITs, the investor relations team also will speak directly with investors and financial advisors and field inbound calls from its long-term investors and other shareholders.
One of the key educational efforts for Nareit has focused on raising REIT allocations. “We are making the assertion that all retail accounts should have somewhere between 5 and 15 percent invested in REITs, and that is what our research supports,” Walten says. For example, David Swensen, PhD, CIO of the Yale University endowment and author of Unconventional Success: A Fundamental Approach to Personal Investment, recommends a 15 percent allocation to REITs for most investors.
Through suggested guidelines from its investment policy committee, Edward Jones recommends including REITs as part of a diversified portfolio with suggested allocations that range between 3 and 7 percent, depending on the specific portfolio objectives. “It’s up to the individual advisor to understand the client and what’s important to them, using an established process to understand and document their goals and comfort with risk,” says Kevin Lampo, CFA, a financial advisor with Edward Jones in Overland Park, Kansas.
Once that is established, the advisor helps the client build a portfolio based on that profile. So, a portfolio may or may not have an allocation to REITs depending on the circumstances, notes Lampo. In addition, the focus at Edward Jones is to partner with clients throughout their lives. “Why that’s important is because while REITs might not be appropriate for them today, they may be appropriate at some point in their lives.”
Honing Selling Points
Both Nareit and individual REITs are sending a consistent message on the advantages REITs offer to retail investors that include portfolio diversification, liquidity, and long-term investments that provide income and growth.
The discussion on public REITs with individual clients typically revolves around the diversification benefit of adding REITs to any portfolio, agrees Lampo. Some clients also are attracted to the dividend yield that REITs offer. However, when people come in focused solely on that dividend yield, it is important to bring the conversation back to their long-term goals and objectives and make sure they understand why or why not a specific REIT would fit in their portfolio, Lampo adds. “So, there is still a lot of education opportunities out there for the industry to teach individual investors what role REITs provide,” he says.
According to advisor surveys conducted by Investment News, 80 percent of investment advisors recommended REITs to their clients in 2017, which is up compared to 73 percent in 2016. In addition, leading investment management firms, such as BlackRock, Fidelity, and State Street Global Advisors, offer REIT-focused products.
Certified Financial Planner Delia Fernandez frequently talks about REIT investing with her clients. In most cases, the larger clients are more apt to buy individual REIT stocks, while smaller clients tend to gravitate toward a mutual fund or a REIT index fund. “I do consider REITs as a category to include in most portfolios, and that’s mainly because of its income,” says Fernandez, president and owner of Fernandez Financial Advisory LLC in Los Alamitos, California.
Fernandez typically deals with middle-class clients who have saved money in their 401(k)s or IRAs or perhaps have inherited money, but they don’t have great wealth. “These people like income. So, they are attracted to REITs for that purpose, but they also take a look at the increases in certain asset classes,” she says.
People do get excited about the yield they can get with a REIT stock—without having to worry about the “tenants and toilets” of directly owning and managing a real estate rental property, Fernandez notes.
Nareit has a number of marketing initiatives, including brochures, email campaigns, and newsletters, that are designed to tell the REIT story to the financial advisor audience and to retail investors. “It is really meant to equip financial advisors with the tools to be able to educate their clients,” says Abby McCarthy, vice president, investment affairs and investor education at Nareit. For example, Nareit does a quarterly newsletter with an organization called Advisor Access, which reaches a broad retail financial advisor audience with a database of about 100,000 people, that includes both the registered investment advisor (RIA) and the broker-dealer community.
Twenty years ago, the average person on the street didn’t know what REIT stood for and there was a lot of investor 101 education that was necessary. “REITs are now really mainstream investments,” she says. As such, REIT education is more sophisticated. “We are no longer having to teach people what REITs are, but rather we are going straight into what REITs can do for an investment portfolio,” McCarthy says.
Plenty of people can’t wait to tell you how much they don’t like hospitals. On the other hand, Edward Aldag, Jr., chairman, president and CEO of Medical Properties Trust (NYSE: MPW), loves them.
Aldag’s interest began in the 1980s, when he worked in a rehabilitation hospital. After graduating from college in 1986, he spent the next 15 years investing in rehabilitation hospitals for two private real estate companies.
Convinced that there was room for a niche player to provide capital to acute care facilities through long-term triple-net leases, Aldag began assembling a management team in 2002 that understood health care financing and operations.
“When we put together the idea of starting a health care REIT, we knew from the beginning that we would focus on acute care facilities. Everyone involved from the very beginning owned or operated hospitals,” Aldag says.
Formed in 2003, Medical Properties has never wavered from its hospital-centric strategy. The company’s precise focus has enabled it to become the largest owner of hospitals in the United States in terms of the value of its portfolio—more than $10 billion—and a growing presence in health care real estate internationally.
Advantages of Specialization
Hospitals were a bright spot in 2017 among health care real estate subsectors. Alex Pettee, president and portfolio manager of Hoya Capital Real Estate, attributed their strength to being relatively supply constrained and less exposed to health care policy changes than other segments of the sector.
For its part, Medical Properties saw its stock price rise 19.3 percent in 2017, while the FTSE Nareit Health Care REIT Index was up 0.9 percent.
“Medical Properties was one of the top-performing REITs in the health care space in 2017, defying the broader headwinds facing the health care sector,” Pettee says. “Investors have applauded [Medical Properties’] capital recycling effort as the firm has been proactive in selling properties with struggling operators and redeploying the capital into facilities with more stable cash flows. As the lone hospital-focused REIT, they have established themselves as a dominant player in a market where scale is increasingly important.”
Aldag attributes Medical Properties’ success to the fact they’ve owned more than 300 facilities in the past 15 years and only needed to place a lien on one tenant. “We do our underwriting really thoroughly,” Aldag points out. “Plus, it’s better to be a bigger company with more cash.”
Jordan Sadler, an equity research analyst at Key Banc Capital Markets, agrees that the focus on hospitals continues to be an advantage to the REIT. “While diversification of assets can be good sometimes, sometimes it can be bad when the leadership becomes ‘jack of all trades and master of none’,” he adds.
During the past two decades, REIT investors have placed a premium on specialization, Pettee explains.
“Medical Properties is a perfect example of how laser-focused executives can create value even in an otherwise anemic underlying operating environment,” he says. “Being the lone dominant player in the hospital space, the positive effects of this specialization are magnified as Medical Properties has been able to skillfully redeploy capital to create value for shareholders.”
Specialization at Medical Properties includes a management team with hospital operations experience as well as other health care, finance and real estate backgrounds.
“Medical Properties’ portfolio is carefully chosen so that the facilities are extremely important to their communities,” says Drew Babin, a senior research analyst with Robert W. Baird & Co. “They structure their leases so that even if they have to change the operator, the facility will need to stay open.”
Global Investments for Diversification
Medical Properties’ scale and expertise led the company to begin investing in Europe about five years ago. The company owns medical facilities in the United Kingdom, Germany, Italy and Spain.
“We still believe the U.S. has the best health care in the world, but there are periodic times of disruption,” says Aldag. “It’s always been part of our plan to expand into Western Europe.” Aldag says.
Medical Properties waited to expand abroad until the management team felt the company was big enough to handle it. “We chose Western Europe because the culture is similar to the U.S. and we could trust in the rule of law,” says Aldag.
Approximately 20 percent of Medical Properties’ portfolio is invested in Europe now, with the other 80 percent in the U.S. The future goal is for this ratio to be 30 percent European investments and 70 percent U.S.-based.
One issue that caused some volatility in Medical Properties’ stock early in 2017 was the bankruptcy of Adeptus Health, an operator of freestanding emergency room facilities.
“Medical Properties was the primary financier and creditor for Adeptus, which was doing great for awhile and then basically went to zero,” Sadler says. “The way Medical Properties handled this is just another testament to its strong underwriting skill.”
Medical Properties dealt with Adeptus’ bankruptcy quickly by re-leasing the space to a high-quality system and was able to maintain its existing rents.
“We were well-protected with our master lease and we knew the locations well,” Aldag explains. “Our underwriting was good and we were comfortable with where we were all along. Our investors were worried, but they came back. We never lost any money and now we have stronger tenants than before.”
Deerfield Management acquired Adeptus, which remained current on all lease payments during the bankruptcy. “It’s always a good feeling to tell people how things will go when you face a challenge and then have them actually go that way,” Aldag says.
To Babin, the event was consistent with the history of Medical Properties’ management team.
“The Adeptus situation shows how well Medical Properties plans and the adeptness of the organization,” Babin points out. “Medical Properties has a very impressive batting average and excellent stability of cash flow even though their operators are private and therefore have less transparency.”
A second challenge, which Medical Properties has already begun to address, is the acquisition of 11 health care facilities operated by Steward Health Care. Aldag says the $1.5 billion Steward transaction was completed ahead of schedule and created value for shareholders. However, Medical Properties is also actively working on joint ventures and other non-Steward transactions to reduce the percentage of Steward-operated facilities as a part of the Medical Properties portfolio, according to Aldag.
“A catalyst for change at Medical Properties is their over-exposure to Steward Health Care, which operates about 38 percent of their portfolio,” Babin observes. “Medical Properties is addressing this with a goal of reducing that exposure to about 25 percent.”
The attempted repeal of the Affordable Care Act does create some lingering uncertainty in the health care real estate market, but that doesn’t worry Aldag much. Reimbursement issues have always been an issue and will always be in a state of change, he says.
“One thing I know is that hospitals will always be here because they have to be for certain things,” Aldag states. “What I think about more is underwriting. If a hospital is integral to a community and people won’t be able to get services without it, then we want to invest in it regardless of what’s happening with reimbursements.”
Aldag says the management team looks for situations to invest in and work with strong operators, which he says is a good model for the efficient use of capital. “I expect Medical Properties to be aggressive and to acquire more properties this year,” Babin says. “Unlike the rest of the health care sector, there’s not that much competition for hospitals.”
Medical Properties typically spends $500 million to $1 billion annually on acquisitions, but Aldag says the company spent about $2 billion in 2017. He anticipates a similar spending level in 2018.
“Total returns for Medical Properties this year should be very positive,” according to Babin. “They trade inexpensively, well below where they should be. They just need to fight off that perception some people have that the hospital space is tough.”
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